When The Tide Went Out: 2008

by puneinvestor


If 2001 wasn’t confirmation enough that India was firmly linked to the global financial system, 2008 brought the message home loud and clear. The mortgage securities crisis in the US directly affected investment and business in India. Foreign institutional money left the country, the Indian rupee weakened and credit conditions tightened.

This time there were no scams or scandals that were to blame, just the biggest global financial shock in living memory. A grim reminder that a crisis can emerge from anywhere and at any time if sufficient imbalances have developed over a period of time.

As usual, there were horror stories of retail investors losing their shirts amid the meltdown. Of course it is always the leveraged investor that suffers. That other rare kind, the unleveraged investor, lives to fight another day even in a market that falls 50%. Highly leveraged companies too, usually cannot avoid being caught in their birthday suits when the tide goes out. Among the infamous Indian casualties of 2008 were a real estate developer that lost 90% of its market capitalisation and is still languishing at roughly the same price today, and a power infrastructure company that, six years later, is at roughly 5% of its early 2008 market capitalisation. I picked these two examples not because their falls were the steepest but because they were market darlings in 2008. Popularity seems to offer no protection during tough times.

Once again, the long-term investor who held on to the index through the crash came out in front by the end of 2009. The index, after 2009, stayed quite flat for a few years and one would have had to do better than the NIFTY to make a decent return. Nevertheless, the point of this post and the two before it was to show that the Indian stock market, over a reasonable amount of time, is by no means a risky place in terms of loss of capital.

This conclusion runs contrary to popular perception in India about the stock market. Most households still consider equity investments as very risky – not a place to put your hard-earned money. The crashes of 1992, 2001 and 2008 show us that if the investor avoids borrowing money (that means no derivatives and no margin trading), is sufficiently diversified and stays with the programme, the equity asset class is no riskier than those other favourite asset classes in India – gold and real estate.